Sat, Apr 14, 2012 - Page 8 News List

Fast rising prices set to slow growth

By Lee Wo-chiang 李沃牆

The impact of rising fuel prices on overall economic growth should not be underestimated. Following the recent fuel price hike, the price of electricity is set to go up too. The combined effect of fuel and electricity price rises will work through economic circulation to increase businesses’ production costs, so that companies’ production output and profits are both liable to fall.

Needless to say, commodity prices will also rise. A 10 percent rise in the price of oil is calculated to push consumer goods prices up by 0.37 percent, while a 10 percent rise in the price of electricity will bring about a 0.365 percent rise. This effect is already making itself felt among ordinary salary earners as it causes their real wages to fall. Once again, people are asking why everything keeps going up, but wages never do. The government should take this situation seriously and do its best to come up with a response.

Taiwan is an island economy, and our economic growth depends on foreign trade. Exports account for more than 60 percent of Taiwan’s GDP. According to figures published by the Bureau of Foreign Trade, Taiwan’s total exports contracted by 4.5 percent in January and February this year. This bigger-than-usual contraction indicates that Taiwan’s overall export growth is slowing down. At the same time, the Council for Economic Planning and Development’s indicators for the nation’s economic health have for four months in a row shown a “blue light,” signifying a recession.

Although Greece’s crisis has been resolved for the time being, manufacturing in the eurozone has been in recession for eight months in a row and unemployment rates are high. Consequently, the eurozone’s growth prospects are rather gloomy. Although the US economy is becoming more stable, the pace of recovery is slow. While the world has great hopes for the world’s second-largest economy, China, it has been growing less rapidly this year. China has cut its growth target for this year from 8 percent to 7.5 percent. China is an important export market for Taiwan, with the share of Taiwan’s exports going to China exceeding 40 percent. Exports to China account for 14 percent of Taiwan’s GDP. Europe, the US and China are Taiwan’s main export markets, so their influence on our economy is considerable.

Finding ways to stabilize commodity prices, stimulate the economy and create job opportunities are all urgent tasks. The government should think about how to increase effective demand and find additional sources of revenue. Rising prices discourage consumption, so it is not easy to increase active consumption. That being the case, the government can, if need be, consider stimulating the economy through passive consumption by again issuing consumer vouchers, as it did in 2009. Another point is that in imposing capital gains tax, which is a tax on the rich, the government should take action and implement clear complementary measures. It should also think about imposing a hot-money tax on arbitrage speculators.

With respect to foreign trade, the free-trade agreement (FTA) between the US and South Korea that came into force on March 15 presents a threat to Taiwan. The Ministry of Finance estimates that this FTA may cause a 0.05 percent reduction in Taiwan’s economic growth. Faced with competition from abroad, the government should, in addition to completing follow-up agreements to the cross-strait Economic Cooperation Framework Agreement, also seek to sign FTAs with various other countries to avoid marginalization.

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